Fintech nCino pays up for big move into mortgage banking software

Fintech company nCino Inc. is making a big bet with its pricey acquisition of SimpleNexus LLC, a digital homeownership software company.

With the deal, nCino will jump into the mortgage space and acquire expertise in building consumer-facing technology, said co-founder and CEO Pierre Naude. Wilmington, N.C.-based nCino, which went public in July 2020, provides a digital platform that allows banks to process commercial loans and other products in a fully digital environment.

Somewhat similarly, SimpleNexus provides a digital experience for mortgage bankers to process home loan applications, so the deal expands nCino's product offerings and provides a cross-sell opportunity as nCino can pitch its many bank clients on adopting the mortgage platform. But the deal's various upsides came with a $1.2 billion price tag that valued the seller at more than 28 times its revenue over the last 12 months.

"They told us a number. We obviously had a bit of heartburn upfront and [I said], 'Well, I've got to get over this one,'" Naude said in an interview. "It's an accretive deal for us, both on a stock price perspective as well as from a multiple perspective, it's accretive. It's also accretive on a growth perspective."

Top dollar

Fintech valuations have soared over the last year, and the price tag was relatively similar to nCino's own valuation, with a total enterprise value 29x its last 12 months' revenue in early November. Market reaction was skittish on the deal, with nCino's stock down 4.1% the day after the announcement. Investors kept selling off on the second day, with a dramatic 7.9% loss on Nov. 18. Analysts largely took the deal in stride, reasoning that the acquisition would accelerate nCino's growth profile.

For high-growth fintechs, valuations are usually based on undisclosed projected forward-earnings, according to Vikas Shah, a managing director with Rosenblatt Securities and leader of the company's fintech investment banking initiative.

"Most of the time, the numbers that you see can be deceiving," he said in an interview. "You may see this massive number on a trailing 12-month basis, but on a forward-looking basis, it may not be so."

Buyers may also pay large multiples for high-growth fintech companies if there are multiple bidders or if the buyer is comfortable paying up in order to avoid the execution risk that comes with building products, Shah said.

Analysts applauded SimpleNexus' subscription-based revenue model, which shields it from being reliant on mortgage volume. The company's total revenue for the 12 months ended Sept. 30 was about $41.6 million, with a new revenue retention rate of 163%.

"While SimpleNexus likely benefited from heightened mortgage originations over the past two years, investors should take solace in its seat-based subscription pricing model," Raymond James analyst Alexander Sklar wrote in a Nov. 16 note.

Analysts also saw potential in the cross-selling opportunities. SimpleNexus' current customer base includes more than 300 independent mortgage banks and 41,000 loan originators. It also includes more than 80 banks and credit unions, an area for cross-sell opportunities as nCino services more than 1,100 credit unions and banks.

"All of them will become prospects for the SimpleNexus solution," Naude said.

The fintech could execute on those cross-selling opportunities in the small- to mid-size bank and credit union space soon after the close, wrote Truist Securities analyst Terry Tillman in a Nov. 16 note. Tillman called the deal a "bold move" for nCino while adding that it "represents one of a number of key growth drivers that could sustain strong compounding growth over a longer-term basis."

The relationship between nCino, which provides lending operation systems for financial institutions, and SimpleNexus began as discussions about a potential partnership but soon morphed into M&A discussions. While nCino was attracted to the "immediate entry" into the mortgage space and enhancing its retail footprint, adding expertise in building front-end interfaces was also a highlight, Naude said.

"We're very good at and honed the skill to take that middle-back office, everything the bankers touch, and make that very efficient. What's newer to us is the front-end consumer interfaces," he said. "SimpleNexus brings the knowledge, the technology, so I can accelerate that."

Naude said nCino was also comfortable with the hefty price tag because of a scarcity of great assets in the marketplace. And he said the large deal would not preclude nCino from looking for more M&A opportunities, especially for targets that could boost the company's nCino IQ applications, which deliver data analytics and artificial intelligence and machine learning capabilities.

"If I see good companies that's focused in those areas like automated decisioning or automated underwriting, things like that, it's very compelling," he said. "Sometimes it's just better to buy versus build."